Crude prices abruptly fell nearly 6 per cent yesterday, retreating on a report that Saudi Arabia would recover from a devastating attack on its oil supply chain sooner than expected.
Weekend drone strikes took out a processing plant and nearby oil field operated by state-owned Aramco, forcing the company to cut its output in half. That took 5.7 million barrels of crude out of daily circulation, or nearly 6 per cent of the 100 million barrels consumed worldwide. Analysts said a quick resolution was crucial to ensuring against disruptions in the supply chain and a corresponding jump in fuel prices.
On Tuesday, Reuters reported that the world's second-largest oil producer would resume normal production within two to three weeks. The report, citing top Saudi sources who've been briefed on the matter, said Aramco already had restored nearly restored 70 per cent of its lost oil production.
Aramco churned out 9.85 million barrels per day in August, according to the US Energy Information Administration. The Kingdom has the capacity to pump up to 12 million barrels per day, the only nation in the world with that kind of elasticity.
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Brent crude oil, petroleum's international benchmark, was trading down 4 per cent at noon Tuesday at a price of around US$66 per barrel. Brent had spiked nearly 20 per cent to US$72 per barrel in the wake of the attacks. West Texas Intermediate, the US benchmark, was selling for US$60 on the futures market, down around 3.8 per cent from Monday's close.
The price swings illustrate the fragility of the world's oil delivery system. The world energy market is a complex balance that delivers 100 million barrels a day from a constellation of producers to virtually every country on the planet.
Even before last week's attack in Saudi Arabia, it has been abundantly clear that the global supply is vulnerable to geopolitical disruption," said analyst Pavel Molchanov of Raymond James. "We have seen this during the Arab Spring with frequent disruptions in places like Libya. We have seen it for decades with rebel violence in Nigeria. And more recently, we have seen a production meltdown in Venezuela, which is happening for internal political reasons."
Shares of international oil companies - known as the supermajors - such as BP, ExxonMobil and Chevron were all trading slightly lower Tuesday afternoon. Companies that service and supply the supermajors also declined; Halliburton and Schlumberger Limited had shed than 4 per cent.
It is unclear whether news of Aramco's recovery timeline will stop the release of crude oil from the US' Strategic Petroleum Reserve. On Sunday, US President Trump announced via Twitter that he had authorised the release of a yet-unspecified amount of crude oil from the 600-million-barrel reserve to "keep the markets well-supplied." It takes 13 days for SPR oil to hit markets after a presidential decision.
Experts had projected that the strikes could translate to gas price increases of 10 to 25 cents a gallon, depending on how long Aramco took to get its production back on track. The average gas price in the US Tuesday was US$2.59 per gallon ($4.07 per 3.8 litres), down 25 cents from a year ago.